Today, a dollar buys about 10,000 of the Iranian currency; subsidy cuts and sanctions are boosting prices, worrying the government.

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Gasoline prices in Iran will fall sometime in the next few months from 4,000 rials a liter (about $1.46 a gallon) to just four rials – and maybe even as little as 0.4 of a rial – but the country’s motorists won’t have any reason to celebrate.

Iran doesn’t plan to cut fuel prices. Instead, it’s going to lop an as yet undetermined number of zeros off its currency in an attempt to create an atmosphere of lower inflation without actually stabilizing or lowering prices. Today, a dollar buys about 10,000 of the Iranian currency, so even small purchases run into big sums in rial terms.

Shamseddin Hoseini, Iran’s minister of economic affairs and finance, told the IRNA news agency over the weekend that the rial will lose three of its zeros once unspecified “prerequisites” are achieved. He said the change would simplify business transactions, greasing the wheels of the economy. Three days later, Iran’s central bank governor, Mahmoud Bahmani, said he would present a proposal to the government sometime in the next six months to eliminate four zeros from the rial.

Either way, the government will have its work cut out for it. Iranian inflation has been climbing, especially since subsidies were slashed last December, and the history of countries tinkering with their currencies as a palliative doesn’t provide a promising precedent. But faced with an economy hammered by internal inefficiencies and international sanctions, the government’s ability to tackle inflation is limited.

“Inflation has been accelerating in the last few months,” Djavad Salehi-Isfahani, a non-resident senior fellow at the Brookings Institution in Washington DC, told The Media Line. Consumer prices jumped 3.4% in March, about half of that due to holiday spending, he said. “You’re talking about annual inflation of 20% minimum. That’s politically unacceptable.”

Iran’s economy should be benefitting from the global economic recovery and higher oil prices. But United Nations-imposed sanctions and political uncertainty have taken a toll on trade and investment, forcing the government to take unpopular measures such as last December’s subsidy cuts. Iran has seen little popular unrest as a result, but high unemployment and rising prices have led to unrest elsewhere in the Middle East.

Indeed, conditions have become so difficult that officials have tried to rally ordinary Iranians by putting the sacrifices required by the subsidiary cuts in terms of warfare. Ayatollah Ali Khamenei, the country’s supreme leader, has dubbed the new Iranian year "The Year of Economic Jihad," calling for concerted efforts to prepare the grounds for a decade of economic growth.

Last December’s subsidy cuts have done more than boost prices. They have hit consumers in the pocketbook, forcing families to cut back on spending and hurting economic activity, BMI said. Gross domestic product will edge up just 2% annually on average between now and the 2014/15 fiscal year (Iran uses a March-to-March fiscal year).

“There’s no question that the most important problem confronting Iranian society, much more than the political issues, has to do with daily bread. The failure of the Ahmadinejad government in this particular area has been quite significant,” Mehrdad Khonsari, secretary-general of the Green Wave, an Iranian opposition group, and an independent scholar, told The Media Line.

“Like the rest of the Middle East the two issues of bread and corruption will motivate the pubic to stand up for their rights,” he said.

Iran doesn’t publish GDP growth figures, but Salehi-Isfahani estimated
it was no more than 1% in the last fiscal year, meaning per capita
growth was negative.

Consumer prices have been rising since the middle of last year and were
up 12.4% in the 12 months through March, compared with the same time a
year earlier, according to official statistics. But most economists say
inflation exceeds the official forecast. Business Monitor International
(BMI) estimated that consumer price inflation and producer price
inflation will average at least 20% year-on-year in 2011.

“Although President Mahmoud Ahmadinejad has stated his intention to
control the rate of consumer price rises by monitoring and enforcing
price ceilings on goods and services, many local businesses have not
appeared willing to follow Tehran’s policies,” BMI said.

Bahmani, Iran’s central bank chief, said studies by the central bank
indicated that taking four zeros off would have positive effects and
dismissed arguments that it will lead to an increase in inflation. But
many Iranian experts have argued that revaluing the currency may stoke
inflation by giving consumers the feeling that prices are lower,
allowing sellers to raise prices more freely.

In any case, the record of currency overhauls is at best mixed. In 2008,
Zimbabwe cut 10 zeros off its currency but failed to arrest
hyperinflation. Turkey took an ever more dramatic step in 2005,
replacing each one million lira note with one in a bid to end
decades-long hyperinflation. The move was successful.

Israel revalued its currency twice – replacing every 10 of its lira with
one shekel in 1980 and repeating the exercise again in 1985 by
substituting 1,000 shekels with one new shekel. The first time failed to
stem inflation, which accelerated in the following years to triple
digits. The second time inflation was tamed, but the step was taken as
part of a wide-ranging price-stabilization program.

The idea of a rial revaluation has been raised repeatedly. In 2007, the
parliamentary economics committee proposed a revaluation as did the
central bank a year later, suggesting the new currency be called the
toman. Last year Ahmadinejad declared he would wipe three zeros off the
rial as part of a wider economic reform program.

Salehi-Isfahani said Iran has few of the tools economic policy makers in
more developed countries use to control inflation. He said officials
typically order banks to restrict new borrowing, a step he said would
slow economic activity and increase unemployment.

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